My personal blog about international trade, public policy & politics, pop culture, and stuff that probably interests only me

Wednesday, August 31, 2011

The Rapid Descent from State Capitalism to Protectionism

Solyndra, the poster-child for President Obama's big plans to magically convert the American economy into a "green technology" powerhouse through massive government subsidies, declared bankruptcy today. As I've notedrepeatedly here, Solyndra received a $535 million federal loan guarantee from the Department of Energy but has faced serious financial problems for over a year, so its failure is hardly surprising (unless, of course, you think that Presidential pep-talks can save a struggling business). What's also not surprising - at least for the 12 people who read this blog regularly - is the administration's highly troubling response to Solyndra's announcement, one which perfectly demonstrates how "state capitalism" breeds economic nationalism and, in many cases, protectionism (emphasis mine):

Since 2009, the Department of Energy’s Loan Program has supported a robust, diverse portfolio of more than 40 projects that are investing in pioneering companies as we work to regain American leadership in the global race for clean energy jobs. These projects include the world’s largest wind farm, several of the world’s largest solar generation facilities, one of the country’s first commercial-scale cellulosic ethanol plants, and the first new nuclear power plant in the U.S. in the last three decades. Collectively, the projects plan to employ more than 60,000 Americans, create tens of thousands of indirect jobs, provide clean electricity to power three million homes, and save more than 300 million gallons of gasoline a year.

Our loan program catalyzes American innovation and private sector investment behind promising companies -- so that American workers have a chance to compete against China and other countries that much more heavily subsidize clean energy companies. While each transaction undergoes months of extensive and careful expert review to minimize risk, there will always be an element of risk with investments in the most innovative companies. The alternative is simply walking off the field and letting the rest of the world pass us by.

Solar panel manufacturing is a growing international market, with increasingly intense competition from Chinese manufacturers who are supported in many cases by interest free government financing that is much more generous than what the U.S. provides. The price for solar cells has fallen 42 percent since the beginning of the year -- even as European countries, currently the largest market for solar panels, are facing economic turmoil and have greatly reduced subsidies for solar power. The changing economics have affected a number of solar manufacturers in recent months, including unfortunately, Solyndra, a once very promising company that has increased its sales revenue by 2000 percent in three years and sold more than 1000 installations in 20 countries. As a result, Solyndra now plans to suspend its manufacturing operations and file for bankruptcy protection.

Now, leaving aside the bizarre fact that the US Department of Energy has apparently now become an investment bank and jobs program, what the bolded passages above make clear is that the Obama administration is blaming China, not DOE's bad investment decisions or the clear inability of solar power to survive without federal assistance, for Solyndra's failure. No, it's China and its "heavily subsidized" companies who receive "interest free government financing" that caused Solyndra to collapse, so angry American taxpayers should direct their ire at the Chinese and their subsidies, not the Obama administration (and, umm, its subsidies), for Solyndra's demise and the flushing of millions of taxpayer dollars down the collective (pun intended) toilet. It's also that dastardly China who threatens "American leadership in the global race for clean energy jobs" and "projects [that] plan to employ more than 60,000 Americans... [and] create tens of thousands of indirect jobs." (Yes, "other countries" were also noted, but none by name, so let's not be naive here; the target is clear.)

Such a response is not only kinda pathetic (DOE also fingered the Bush administration and Congress), but also highly troubling because it could easily stoke nationalist and protectionist sentiment in government and the general public. Indeed, by shifting the political blame to China, the press release seems intended to do just that (and, of course, to argue that future green "success" just requires bigger truckloads of borrowed taxpayer money). But as disturbing as DOE's statement is, not a word of it should be surprising because economic nationalism and (sometimes) outright protectionism are the inevitable outcomes of state capitalism. Indeed, I warned of this very thing just a few months ago when commenting on an op-ed by economist Art Carden on government "investment" and the President's call to "win the future":

Carden's explanation of the pernicious side effects of government "investment" deserves further discussion. He does a great job laying out how special interests inevitably distort government investment plans, but I think he glosses over perhaps the bigger problem with state meddling in the private sector: it breeds economic nationalism.

As Carden rightly notes, government "investors" (i.e., elected officials subsidizing commercial enterprises with your and my tax dollars) respond to political, rather than market, incentives and can easily throw more money (again, our tax dollars) at a project regardless of the economic return on that investment. In short, as long as the political returns - be they votes or campaign contributions - remain high, then the government investor has an incentive to keep on investing. It's this troubling dynamic that has given us more than three decades of government "investment" boondoggles in corn ethanol and other "green" technologies. (To see just how long we've sucked at "investing" in environmental technologies, Google "carter synfuels" some time.)

At some point, however, the money does run out, and that's where things can get really scary. As we've learned during the current state and federal budget crises, government funds aren't truly unlimited (thank goodness). But, even though the state/federal coffers are dry(er), the political incentives remain equally strong - government investors still have a serious political stake (read: re-election) in seeing their investments be successful. Without a limitless supply of money to throw at a politician's chosen company/industry, he will almost inevitably seek other means to ensure the political returns on his "investments." And, unlike private investors, he has at his fingertips the full force of the government to improve his investments' prospects should things go sour.

Of course, when it comes to government "investment," things almost always go sour (see above).
So not only do we get bajillions of tax dollars thrown down the toilet for government projects captured by special interest lobbying, but we also get a healthy dose of government coercion to tilt the playing field in those projects' favor. Sometimes, this coercion rears its head through top-down usage mandates like the gas/ethanol mix. More often, it appears in the form of economic nationalism - particularly trade protectionism - because in today's global economy eliminating foreign competition is one of the easiest ways to improve your investment's chances. (See, e.g., the current tariff on sugar ethanol.) Of course, when a government official can't do that, she can at least blame the foreigners for the failure of her blessed programs and convince the public that "free trade," not her programs, caused all of their economic ills.

And that brings us back to the troubling protectionist implications of the President's repeated calls for more government "investment" during the SOTU...

So if/when President Obama's "investments" in green technology and other industries fail (as they probably will), and when the federal budget (and House Republicans) simply can't tolerate even more money being thrown at these failed investments, where will he turn? Will he cut his losses and admit failure? Will he force Americans to buy/use these failed products regardless of their economic (and environmental) value? Or will he blame the country's "adversaries" (i.e., foreign competition) and attempt to erect trade barriers?

According to the [Michigan ex-Governor Jennifer] "Granholm model," it'll be the last option, and, really, we shouldn't be surprised if/when that happens. I mean, it's the natural result of an economic model based on national "competitiveness" and government "investment," now isn't it?

Sounds familiar, doesn't it?

At this point, we're clearly out of money and the House GOP isn't breaking out the credit card anytime soon, so DOE's implicit calls for more green energy subsidies are almost certainly going to go unheeded (thank goodness). And with very-public failures like Solyndra putting a very-public spotlight on the Obama administration's green energy money pit, scapegoats are going to be needed. On green technology, China has clearly become the President's first choice: indeed, the Energy Department has been left to implicitly deride Chinese subsidies instead of openly praising the significant proliferation in "cheap" solar power that's mentioned in its very own press release! But one must wonder whether, if/when several other of President Obama's green poster children go belly up, will the "China blame game" be enough to salvage the President's political prospects? Or will protectionism - and an inevitable confrontation with one of America's largest trading partners - be the administration's next move?

I don't know the answer to these questions; nobody does. But last sentence of the DOE release could be a warning as to which way the Obama administration is leaning: "While we are disappointed by this outcome, we continue to believe the clean energy jobs race is one that America can, must and will win."

Shudder to think how they'll try to rig the game to ensure that "victory."